Case overview
Ms Waller Edwards (the "Appellant") was financially independent when she entered into a relationship with a property developer, Mr Bishop. Mr Bishop persuaded the Appellant to exchange her home and savings for another property that was ultimately re-mortgaged for £440,000 with One Savings Bank Plc (the "Bank”). The Bank understood that, whilst the majority of the loan was for the benefit of both the Appellant and Mr Bishop, part of it was solely for Mr Bishop's benefit (£39,500 being earmarked for Mr Bishop's personal debts).
The relationship between the Appellant and Mr Bishop ended. The Appellant remained in the property but could not service the mortgage payments, resulting in repossession proceedings. Relying on Royal Bank of Scotland plc v Etridge (No 2) (2001) ("Etridge"), the Appellant argued that the loan and the associated security were unenforceable due to undue influence exerted by Mr Bishop.
Relevant law
In Etridge, the House of Lords held that where a lender is “put on inquiry” of undue influence, it must take protective steps - commonly referred to as the Etridge protocol - to ensure the borrower enters the transaction free from undue influence and with informed consent. The Court held:
“where a wife becomes surety for her husband's debts…the bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes."
Therefore, a lender is put on inquiry where a spouse guarantees the other’s debts. However, on the basis of Etridge, a lender was not put on inquiry in joint borrowing arrangements unless it knew the loan was for one party’s sole benefit. These principles apply equally to unmarried couples.
Decision
In the present case some, but not all, of the money that was jointly borrowed was for Mr Bishop’s sole benefit. This type of arrangement is known as a hybrid transaction.
The Supreme Court had to determine whether, in such cases, the lender is put on inquiry and is required to follow the Etridge protocol to avoid the risk of the transaction being set aside.
The Supreme Court held that
“a creditor is put on inquiry in any non-commercial hybrid transaction where, on the face of the transaction, there is a more than de minimis element of borrowing which serves to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other. The transaction must be viewed from the bank’s perspective. Such a transaction, if viewed in this way, should be regarded as a “surety” transaction and the creditor placed on inquiry of the possibility of undue influence. The steps set out in the Etridge protocol must then be taken.”
The Supreme Court described this as a “bright line” test, meaning lenders must act whenever a non-trivial portion of the loan benefits only one borrower.
Consequently, as the Bank had not followed the protocol, the Appellant succeeded.
Comment
The decision expands the range of situations in which lenders should follow the Etridge protocol and represents another step in continued efforts to strengthen consumer protection for vulnerable borrowers. While this increases compliance obligations, it provides clarity: if the protocol is followed in all non-commercial hybrid cases (save for de minimis ones), the loan is unlikely to be set aside due to undue influence. The bright line test also simplifies the process for lenders, removing the need to assess whether each transaction "is being made for the purposes of suretyship as distinct from the borrowers’ joint purposes". As noted by the Supreme Court, this approach is more practical and easier to apply. Lenders may also consider strengthening controls around joint borrowing, especially in identifying the purpose and beneficiaries of the loan.
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